Letter From the Chairman
The employees of GATX produced another year of outstanding financial results in 2015. Our net income and earnings per share were at record levels. We also earned an excellent return on equity while maintaining a healthy balance sheet and access to attractively priced capital
We generated nearly $1.02 billion of cash from operations and portfolio proceeds, paid more than $68 million in quarterly dividends to our shareholders, and repurchased more than $125 million of common stock. Rail North America’s committed lease receipts increased by 17% to over $4.2 billion. Reflecting confidence in our future financial position, in January, 2016, our Board of Directors increased our quarterly dividend 5.3% to $0.40 per share and granted a new stock repurchase authorization of $300 million.
Our record financial performance and focused fleet management over the past few years have put us in an excellent position to perform well through, and capitalize on, a downturn in the North American railcar market. We have cautioned our investors about an impending downturn since late 2014. While there are a number of metrics that we monitor to understand rail market health, I will address the two that directly guided our thinking: railcar manufacturing backlog and railcar loadings.
Historically, railcar manufacturing backlog tends to reach peak levels due to rising trends in the production of specific commodities that travel heavily by rail. For example, the peak in railcar manufacturing backlog in the mid-2000s was caused by rapidly increasing production of ethanol, which drove record orders for large general-service tank cars to carry this commodity. In recent years, the “boom” in crude oil drilling and production in the United States and Canada triggered huge orders for tank cars and covered hoppers. As the accompanying chart shows, railcar manufacturing peaked at a record 142,800 units in the fourth quarter of 2014, an incredible 62% above the prior peak in 2006.
More important, a majority of this backlog was for tank cars ordered to transport crude oil and small cube covered hoppers earmarked for frac sand service. This was troubling to GATX. Although lease rates on those car types at that time were at record levels, we believed that demand for these cars was unsustainable and that a significant oversupply was rapidly developing.
Turning to North American railcar loadings, the data shown in the chart on the following page also suggested that this increasing oversupply of cars could deliver into a weaker market than anticipated. As the chart demonstrates, not only did railcar loadings over the last few years not reach the level of the prior peak in 2006, they started to trend down in 2015 as the bulk of these railcar orders began to deliver. We realized that a market imbalance was developing that called for us to accelerate our peak market tactics. At GATX, we call this strategy being “cyclically aware.” We responded in a number of ways.
First, and most important, GATX did not chase the crude oil boom and continued to maintain a diverse fleet. Out of our 125,000 railcar fleet in North America, only 2,500 cars carry crude and 2,800 cars carry frac sand. We placed these cars at attractive rates on very long lease terms with financially strong customers who have a propensity to renew our leases. In addition, we managed our near-term renewal exposure by selling cars and renewing leases early. Finally, we redeployed many of these cars into other types of service.
Despite these actions, a sustained downturn will eventually catch up to GATX and negatively impact our business. Thus, we took steps to further improve our cost structure by increasing the efficiency of our maintenance operations, controlling our SG&A and lowering our financing costs.
We have used continuous improvement techniques to advance our strategy of doing more of our railcar maintenance at GATX-owned service centers – rather than using less efficient third-party providers that historically perform almost half of our maintenance.
In 2016, we project that almost 75% of our tank car and specialty freight maintenance will be performed in our owned network – where we believe the safety, quality, delivery and cost metrics are superior. In a declining railcar market where more of our railcars will enter the maintenance network in preparation for leases to different customers, controlling a larger and more efficient network is a key competitive advantage.
Compared to 2008, the year of GATX’s peak financial performance in the last cycle, our SG&A costs have increased at less than the rate of inflation. More important, our SG&A growth has not occurred in our staff areas, but in our Quality and International Rail groups, in line with our strategies to continually improve our maintenance operations and diversify our geographic earnings base.
Lastly, our average financing costs have decreased significantly as we capitalized on low interest rates and the attractive financing markets of the last few years. Today, our average debt cost is 3.8% with an average maturity of 7.2 years, compared to 6.1% and 3.8 years at our last peak in 2008. As a result, our interest expense has been flat over that period despite growing our asset base by nearly 20%.
Our 117 years of success in the railcar leasing business have been the result of matching the extremely long lives of our assets with an extremely long view of our business and strategy. We will continue to avoid short- term “booms” and instead invest with a long-term view. We will continue to enter developing international rail markets with the understanding that it takes years for these investments to earn a sustainable, attractive return. We will continue to return capital to our shareholders through share repurchase and a dividend that has been paid for 96 consecutive years. And we will continue our long-term focus on our vision to be recognized as the finest railcar leasing company in the world by our customers, our shareholders, our employees and the communities where we operate.
Brian A. Kenney
Chairman, President and Chief Executive Officer
GATX Corporation
